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Article: The Impact of Inflation Risk on Forward Trading and Production
Title | The Impact of Inflation Risk on Forward Trading and Production |
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Authors | |
Keywords | Expectation dependence Forward hedging Inflation risk Production |
Issue Date | 2015 |
Publisher | Springer. The Journal's web site is located at http://www.springer.com/economics/journal/10258 |
Citation | Portuguese Economic Journal, 2015, v. 14, p. 65-73 How to Cite? |
Abstract | This paper examines the behavior of a competitive firm that faces joint price and inflation risk. Given that the price risk is negatively correlated with the inflation risk in the sense of expectation dependence, we show that the firm optimally opts for an over-hedge (under-hedge) if the firm's coefficient of relative risk aversion is everywhere no greater (no smaller) than unity. We show further that banning the firm from forward trading may induce the firm to produce more or less, depending on whether the price risk premium is positive or negative, respectively. While the price risk premium is unambiguously negative in the absence of the inflation risk, it is not the case when the inflation risk prevails. In contrast to the conventional wisdom, forward hedging needs not always promote production should firms take inflation seriously. |
Persistent Identifier | http://hdl.handle.net/10722/221918 |
ISSN | 2023 Impact Factor: 2.6 2023 SCImago Journal Rankings: 0.346 |
ISI Accession Number ID |
DC Field | Value | Language |
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dc.contributor.author | Broll, U | - |
dc.contributor.author | Wong, KP | - |
dc.date.accessioned | 2015-12-21T05:47:37Z | - |
dc.date.available | 2015-12-21T05:47:37Z | - |
dc.date.issued | 2015 | - |
dc.identifier.citation | Portuguese Economic Journal, 2015, v. 14, p. 65-73 | - |
dc.identifier.issn | 1617-982X | - |
dc.identifier.uri | http://hdl.handle.net/10722/221918 | - |
dc.description.abstract | This paper examines the behavior of a competitive firm that faces joint price and inflation risk. Given that the price risk is negatively correlated with the inflation risk in the sense of expectation dependence, we show that the firm optimally opts for an over-hedge (under-hedge) if the firm's coefficient of relative risk aversion is everywhere no greater (no smaller) than unity. We show further that banning the firm from forward trading may induce the firm to produce more or less, depending on whether the price risk premium is positive or negative, respectively. While the price risk premium is unambiguously negative in the absence of the inflation risk, it is not the case when the inflation risk prevails. In contrast to the conventional wisdom, forward hedging needs not always promote production should firms take inflation seriously. | - |
dc.language | eng | - |
dc.publisher | Springer. The Journal's web site is located at http://www.springer.com/economics/journal/10258 | - |
dc.relation.ispartof | Portuguese Economic Journal | - |
dc.rights | The final publication is available at Springer via http://dx.doi.org/10.1007/s10258-015-0109-y | - |
dc.subject | Expectation dependence | - |
dc.subject | Forward hedging | - |
dc.subject | Inflation risk | - |
dc.subject | Production | - |
dc.title | The Impact of Inflation Risk on Forward Trading and Production | - |
dc.type | Article | - |
dc.identifier.email | Wong, KP: kpwongc@hkucc.hku.hk | - |
dc.identifier.authority | Wong, KP=rp01112 | - |
dc.description.nature | postprint | - |
dc.identifier.doi | 10.1007/s10258-015-0109-y | - |
dc.identifier.scopus | eid_2-s2.0-84948713498 | - |
dc.identifier.hkuros | 256395 | - |
dc.identifier.volume | 14 | - |
dc.identifier.spage | 65 | - |
dc.identifier.epage | 73 | - |
dc.identifier.eissn | 1617-9838 | - |
dc.identifier.isi | WOS:000365791500005 | - |
dc.identifier.issnl | 1617-982X | - |